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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
(Mark One)
 
 
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to          
Commission File Number 001-13459
 
amglogoa11.jpg
Affiliated Managers Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
04-3218510
(State or other jurisdiction
of incorporation or organization)
 
(IRS Employer Identification Number)
777 South Flagler Drive, West Palm Beach, Florida 33401
(Address of principal executive offices)
(800) 345-1100
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a smaller
reporting company)
 
Smaller reporting company o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
There were 55,960,350 shares of the registrant’s common stock outstanding on August 1, 2017.
 



PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
(unaudited)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2016
 
2017
 
2016
 
2017
Revenue
$
554.1

 
$
570.9

 
$
1,099.5

 
$
1,115.2

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Compensation and related expenses
232.1

 
242.2

 
458.7

 
484.2

Selling, general and administrative
96.6

 
89.1

 
192.5

 
177.8

Intangible amortization and impairments
28.6

 
22.0

 
55.3

 
43.9

Depreciation and other amortization
5.0

 
4.9

 
10.0

 
10.1

Other operating expenses (net)
10.0

 
11.8

 
22.5

 
21.7

Total operating expense (net)
372.3

 
370.0

 
739.0

 
737.7

 
181.8

 
200.9

 
360.5

 
377.5

Income from equity method investments
65.2

 
75.0

 
133.2

 
160.9

Operating income
247.0

 
275.9

 
493.7

 
538.4

 
 
 
 
 
 
 
 
Non-operating (income) and expenses:
 
 
 
 
 
 
 
Investment and other income
(11.6
)
 
(15.7
)
 
(15.6
)
 
(29.2
)
Interest expense
21.9

 
22.4

 
44.0

 
44.3

Imputed interest expense and contingent payment arrangements
0.8

 
2.3

 
(1.1
)
 
3.1

 
11.1

 
9.0

 
27.3

 
18.2

Income before income taxes
235.9

 
266.9

 
466.4

 
520.2

Income taxes
52.3

 
62.5

 
109.4

 
122.2

Net income
183.6

 
204.4

 
357.0

 
398.0

Net income (non-controlling interests)
(75.3
)
 
(78.1
)
 
(144.7
)
 
(149.2
)
Net income (controlling interest)
$
108.3

 
$
126.3

 
$
212.3

 
$
248.8

Average shares outstanding (basic)
53.8

 
56.3

 
53.9

 
56.5

Average shares outstanding (diluted)
56.7

 
58.7

 
56.7

 
59.0

Earnings per share (basic)
$
2.01

 
$
2.24

 
$
3.94

 
$
4.40

Earnings per share (diluted)
$
1.98

 
$
2.22

 
$
3.88

 
$
4.35

Dividends per share
$
—

 
$
0.20

 
$
—

 
$
0.40

The accompanying notes are an integral part of the Consolidated Financial Statements.

2


AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2016
 
2017
 
2016
 
2017
Net income
$
183.6

 
$
204.4

 
$
357.0

 
$
398.0

Other comprehensive income (loss):
 
 
 
 
 
 
 
Controlling interest:
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
(36.7
)
 
20.2

 
(33.8
)
 
31.5

Change in net realized and unrealized gain (loss) on derivative securities, net of tax
0.9

 
(1.3
)
 
(0.1
)
 
(1.9
)
Change in net unrealized gain (loss) on investment securities, net of tax
(13.8
)
 
(4.6
)
 
(24.3
)
 
(1.1
)
Other comprehensive income (loss) (controlling interest)
(49.6
)
 
14.3

 
(58.2
)
 
28.5

Non-controlling interest:
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
(17.2
)
 
6.7

 
(22.1
)
 
7.6

Change in net realized and unrealized gain (loss) on derivative securities, net of tax
(0.6
)
 
0.7

 
(0.7
)
 
1.0

Change in net unrealized gain (loss) on investment securities, net of tax
(0.2
)
 
0.6

 
(0.5
)
 
2.0

Other comprehensive income (loss) (non-controlling interest)
(18.0
)
 
8.0

 
(23.3
)
 
10.6

Other comprehensive income (loss)
(67.6
)
 
22.3

 
(81.5
)
 
39.1

Comprehensive income
116.0

 
226.7

 
275.5

 
437.1

Comprehensive income (non-controlling interests)
(57.3
)
 
(86.1
)
 
(121.4
)
 
(159.8
)
Comprehensive income (controlling interest)
$
58.7

 
$
140.6

 
$
154.1

 
$
277.3

The accompanying notes are an integral part of the Consolidated Financial Statements.

3


AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in millions)
(unaudited)
 
December 31,
2016
 
June 30,
2017
Assets
 
 
 
Cash and cash equivalents
$
430.8

 
$
364.6

Receivables
383.3

 
440.3

Investments in marketable securities
122.4

 
103.6

Other investments
147.5

 
151.8

Fixed assets (net)
110.1

 
109.7

Goodwill
2,628.1

 
2,647.5

Acquired client relationships (net)
1,497.4

 
1,476.1

Equity method investments in Affiliates
3,368.3

 
3,278.7

Other assets
61.2

 
60.0

Total assets
$
8,749.1

 
$
8,632.3

Liabilities and Equity
 
 
 
Payables and accrued liabilities
$
729.3

 
$
618.3

Senior bank debt
868.6

 
788.8

Senior notes
939.4

 
940.6

Convertible securities
301.6

 
303.0

Deferred income taxes
660.8

 
677.0

Other liabilities
149.4

 
203.6

Total liabilities
3,649.1

 
3,531.3

Commitments and contingencies (Note 5)


 


Redeemable non-controlling interests
673.5

 
730.6

Equity:
 
 
 
Common stock ($0.01 par value, 153.0 shares authorized; 58.5 shares outstanding in 2016 and 2017)
0.6

 
0.6

Additional paid-in capital
1,073.5

 
912.3

Accumulated other comprehensive loss
(122.9
)
 
(94.4
)
Retained earnings
3,054.4

 
3,280.3

 
4,005.6

 
4,098.8

Less: Treasury stock, at cost (1.8 shares in 2016 and 2.6 shares in 2017)
(386.0
)
 
(498.8
)
Total stockholders' equity
3,619.6

 
3,600.0

Non-controlling interests
806.9

 
770.4

Total equity
4,426.5

 
4,370.4

Total liabilities and equity
$
8,749.1

 
$
8,632.3

The accompanying notes are an integral part of the Consolidated Financial Statements.

4


AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in millions)
(unaudited)
 
 
 
Total Stockholders’ Equity
 
 
 
 
 
Shares Outstanding
 
Common
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Treasury
Stock at
Cost
 
Non-
controlling
Interests
 
Total
Equity
December 31, 2015
55.8

 
$
0.6

 
$
694.9

 
$
(18.1
)
 
$
2,581.6

 
$
(421.9
)
 
$
932.0

 
$
3,769.1

Net income
—

 
—

 
—

 
—

 
212.3

 
—

 
144.7

 
357.0

Other comprehensive loss
—

 
—

 
—

 
(58.2
)
 
—

 
—

 
(23.3
)
 
(81.5
)
Share-based compensation
—

 
—

 
20.0

 
—

 
—

 
—

 
—

 
20.0

Common stock issued under share-based incentive plans
—

 
—

 
(29.5
)
 
—

 
—

 
30.7

 
—

 
1.2

Share repurchases
—

 
—

 
—

 
—

 
—

 
(33.4
)
 
—

 
(33.4
)
Issuance costs and other
—

 
—

 
(1.0
)
 
—

 
—

 
—

 
—

 
(1.0
)
Affiliate equity activity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Affiliate equity expense
—

 
—

 
2.8

 
—

 
—

 
—

 
8.7

 
11.5

Issuances
—

 
—

 
(6.0
)
 
—

 
—

 
—

 
11.5

 
5.5

Repurchases
—

 
—

 
12.6

 
—

 
—

 
—

 
0.5

 
13.1

Changes in redemption value of Redeemable non-controlling interests
—

 
—

 
(68.7
)
 
—

 
—

 
—

 
—

 
(68.7
)
Transfers to Redeemable non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

 
(20.3
)
 
(20.3
)
Capital contributions by Affiliate equity holders
—

 
—

 
—

 
—

 
—

 
—

 
1.0

 
1.0

Distributions to non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

 
(189.0
)
 
(189.0
)
June 30, 2016
55.8

 
$
0.6

 
$
625.1

 
$
(76.3
)
 
$
2,793.9

 
$
(424.6
)
 
$
865.8

 
$
3,784.5

























5


AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued)
(in millions)
(unaudited)

 
 
 
Total Stockholders’ Equity
 
 
 
 
 
Shares Outstanding
 
Common
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Treasury
Stock at
Cost
 
Non-
controlling
Interests
 
Total
Equity
December 31, 2016
58.5

 
$
0.6

 
$
1,073.5

 
$
(122.9
)
 
$
3,054.4

 
$
(386.0
)
 
$
806.9

 
$
4,426.5

Net income
—

 
—

 
—

 
—

 
248.8

 
—

 
149.2

 
398.0

Other comprehensive income
—

 
—

 
—

 
28.5

 
—

 
—

 
10.6

 
39.1

Share-based compensation
—

 
—

 
19.7

 
—

 
—

 
—

 
—

 
19.7

Common stock issued under share-based incentive plans
—

 
—

 
(79.1
)
 
—

 
—

 
89.4

 
—

 
10.3

Share repurchases
—

 
—

 
—

 
—

 
—

 
(202.2
)
 
—

 
(202.2
)
Dividends
—

 
—

 
—

 
—

 
(22.9
)
 
—

 
—

 
(22.9
)
Issuance costs and other
—

 
—

 
0.3

 
—

 
—

 
—

 
—

 
0.3

Affiliate equity activity:


 


 


 


 


 


 


 


Affiliate equity expense
—

 
—

 
7.1

 
—

 
—

 
—

 
21.4

 
28.5

Issuances
—

 
—

 
(0.2
)
 
—

 
—

 
—

 
2.5

 
2.3

Repurchases
—

 
—

 
33.8

 
—

 
—

 
—

 
—

 
33.8

Changes in redemption value of Redeemable non-controlling interests
—

 
—

 
(142.8
)
 
—

 
—

 
—

 
—

 
(142.8
)
Transfers to Redeemable non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

 
(47.2
)
 
(47.2
)
Capital contributions by Affiliate equity holders
—

 
—

 
—

 
—

 
—

 
—

 
5.6

 
5.6

Distributions to non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

 
(178.6
)
 
(178.6
)
June 30, 2017
58.5

 
$
0.6

 
$
912.3

 
$
(94.4
)
 
$
3,280.3

 
$
(498.8
)
 
$
770.4

 
$
4,370.4

The accompanying notes are an integral part of the Consolidated Financial Statements.

6


AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
For the Six Months Ended June 30,
 
2016
 
2017
Cash flow from (used in) operating activities:
 
 
 
Net income
$
357.0

 
$
398.0

Adjustments to reconcile Net income to net Cash flow from operating activities:
 
 
 
Intangible amortization and impairments
55.3

 
43.9

Depreciation and other amortization
10.0

 
10.1

Deferred income tax provision
50.4

 
56.0

Income from equity method investments, net of amortization
(133.2
)
 
(160.9
)
Distributions of earnings received from equity method investments
205.1

 
283.5

Amortization of issuance costs
2.4

 
2.3

Share-based compensation and Affiliate equity expense
33.2

 
48.2

Other non-cash items
(5.0
)
 
(21.9
)
Changes in assets and liabilities:
 
 
 
Purchases of trading securities by Affiliate sponsored consolidated products
(41.8
)
 
(16.4
)
Sales of trading securities by Affiliate sponsored consolidated products
40.0

 
15.0

Increase in receivables
(50.0
)
 
(75.8
)
Increase in other assets
(5.8
)
 
(4.0
)
Decrease in payables, accrued liabilities and other liabilities
(176.2
)
 
(134.0
)
Cash flow from operating activities
341.4

 
444.0

Cash flow from (used in) investing activities:
 
 
 
Investments in Affiliates
(551.4
)
 
(30.3
)
Purchase of fixed assets
(8.6
)
 
(7.2
)
Purchase of investment securities
(8.0
)
 
(13.6
)
Sale of investment securities
28.0

 
52.1

Cash flow from (used in) investing activities
(540.0
)
 
1.0

Cash flow from (used in) financing activities:
 
 
 
Borrowings of senior debt
585.0

 
205.0

Repayments of senior debt
(330.0
)
 
(285.0
)
Issuance of common stock
7.7

 
29.5

Dividends paid on common stock
—

 
(22.6
)
Repurchase of common stock
(33.4
)
 
(170.2
)
Distributions to non-controlling interests
(189.0
)
 
(178.6
)
Affiliate equity issuances and repurchases
(71.7
)
 
(77.1
)
Settlement of forward equity sale agreement
—

 
5.2

Other financing items
17.0

 
(23.4
)
Cash flow used in financing activities
(14.4
)
 
(517.2
)
Effect of foreign exchange rate changes on cash and cash equivalents
(15.7
)
 
6.0

Net decrease in cash and cash equivalents
(228.7
)
 
(66.2
)
Cash and cash equivalents at beginning of period
563.8

 
430.8

Net cash inflows upon the consolidation and deconsolidation of Affiliate sponsored products
25.3

 
—

Cash and cash equivalents at end of period
$
360.4

 
$
364.6

The accompanying notes are an integral part of the Consolidated Financial Statements.

7
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



1.
Basis of Presentation and Use of Estimates
The Consolidated Financial Statements of Affiliated Managers Group, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair statement of the results have been included and all intercompany balances and transactions have been eliminated. During the quarter, the Company changed its Consolidated Statement of Income presentation to include Income from equity method investments in Operating income, as its equity method Affiliates are integral to the Company’s operations. This change, along with other reclassifications, has been made to the prior period’s financial statements to conform to the current period’s presentation. Operating results for interim periods are not necessarily indicative of the results that may be expected for any other period or for the full year. The Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 includes additional information about its operations, financial position and accounting policies, and should be read in conjunction with this Quarterly Report on Form 10-Q.
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
All amounts in these notes, except per share data in the text and tables herein, are stated in millions unless otherwise indicated.
2.
Recent Accounting Developments
Effective January 1, 2017, the Company adopted Accounting Standard Update (“ASU”) 2016-07, Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting and ASU 2016-06, Derivatives, and Hedging: Contingent Put and Call Options in Debt Instruments. The adoption of these updates did not have a significant impact on the Company’s Consolidated Financial Statements.
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09, Revenue from Contracts with Customers, and subsequently issued several related amendments. The new standard provides a comprehensive model for revenue recognition and is effective for interim and fiscal periods beginning after December 15, 2017. The standard may be adopted using either the full or modified retrospective method. The Company continues to evaluate the impact of this standard on the timing of the recognition of its Revenue and how certain costs will be presented, but does not expect the adoption of this standard to have a significant impact on the timing of the recognition of Revenue.
In January 2016, the FASB issued ASU 2016-01, Fair Value: Recognition and Measurement of Financial Assets and Liabilities.  Under the new standard, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value with any changes recognized through earnings.  The standard is effective for interim and fiscal periods beginning after December 15, 2017 and must be adopted using a modified retrospective method.  The impact of this standard on the Company’s Consolidated Financial Statements will depend on the equity investments held by the Company at the time of adoption.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize assets and liabilities arising from most operating leases on the statement of financial position. The standard is effective for interim and fiscal periods beginning after December 15, 2018 and must be adopted using a modified retrospective method. The Company is evaluating the impact of this standard on its Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which clarifies how cash receipts and cash payments are classified in the statement of cash flows. The standard is effective for interim and fiscal periods beginning after December 15, 2017 and must be adopted using a full retrospective method. The Company does not expect the adoption of this standard to have a significant impact on its Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which provides guidance on evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard is effective for interim and fiscal periods beginning after December 15, 2017. The Company will apply the standard prospectively upon adoption. The impact of this standard on the Company’s Consolidated Financial Statements will depend on acquisitions (or disposals) of assets or businesses by the Company in periods following adoption.

8
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Accounting for Goodwill Impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The standard is effective for interim and fiscal periods beginning after December 15, 2019. The Company will apply the standard prospectively upon adoption. The Company is evaluating the impact of this standard on its Consolidated Financial Statements.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation, which simplifies modification accounting related to share-based arrangements.  Under the new standard, modification assessments will not be required if fair value, vesting conditions and classification would be unaffected by a modification.  The standard is effective for interim and fiscal periods beginning after December 15, 2017.  The Company will apply the standard prospectively upon adoption. The Company does not expect the adoption of this standard to have a significant impact on its Consolidated Financial Statements.
 
3.
Investments in Marketable Securities
Investments in marketable securities at December 31, 2016 and June 30, 2017 were $122.4 million and $103.6 million, respectively. The following is a summary of the cost, gross unrealized gains and losses and fair value of investments classified as available-for-sale and trading:
 
Available-for-Sale
 
Trading
 
December 31,
2016
 
June 30,
2017
 
December 31,
2016
 
June 30,
2017
Cost
$
66.1

 
$
36.0

 
$
34.4

 
$
43.2

Unrealized gains
17.6

 
17.5

 
6.6

 
8.0

Unrealized losses
(1.8
)
 
—

 
(0.5
)
 
(1.1
)
Fair Value
$
81.9

 
$
53.5

 
$
40.5

 
$
50.1

In the three and six months ended June 30, 2016, the Company received proceeds of $28.6 million and $34.4 million, respectively, from the sale of investments classified as available-for-sale and recorded gains of $7.5 million and $9.2 million, respectively. In the three and six months ended June 30, 2017, the Company received proceeds of $13.1 million and $43.3 million, respectively, from the sale of investments classified as available-for-sale and recorded gains of $6.0 million and $11.8 million, respectively. There were no significant realized gains or losses on investments classified as trading in the three and six months ended June 30, 2016. In the three and six months ended June 30, 2017, the Company received proceeds of $7.9 million and $15.0 million, respectively, from the sale of investments classified as trading and recorded net gains of $2.4 million and $3.3 million, respectively. The realized gains and losses on securities held in Affiliate sponsored consolidated products were recorded in Other operating expenses (net), other realized gains and losses were recorded in Investment and other income.
4.
Investments in Affiliates and Affiliate Sponsored Investment Products
Investments in Affiliates

The Company’s Affiliates are consolidated or accounted for under the equity method, depending upon the underlying structure of and relationship with each Affiliate.

A limited number of the Company’s Affiliates are considered voting rights entities (“VREs”) because the total equity investment at risk is sufficient to enable the entities to finance their activities independently and the entities’ equity holders have the right to receive residual returns, the obligation to absorb losses and the right to direct the activities of the entity that most significantly impact its economic performance. Most of the Company’s Affiliates considered VREs are accounted for under the equity method because the Company lacks control, but is deemed to have significant influence.

Substantially all of the Company’s Affiliates are considered variable interest entities (“VIEs”) because they are structured as partnerships (or similar entities) and the limited partners lack substantive kick-out and substantive participation rights over the general partner. The Company consolidates a VIE when it is the general partner (or similar role) and, therefore, the primary beneficiary of the entity, which is defined as having the power to direct the activities that most significantly impact the VIE’s economic performance and the right to receive benefits from or the obligation to absorb losses of the entity that could potentially be significant to the VIE. Substantially all of the Company’s consolidated Affiliates are considered VIEs. The Company applies the equity method of accounting to a VIE when it is not the primary beneficiary.

9
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



The unconsolidated assets, net of liabilities and non-controlling interests of equity method Affiliates considered VIEs, and the Company’s maximum risk of loss were as follows:

 
December 31, 2016
 
June 30, 2017
 
Unconsolidated
VIE Net Assets
 
Carrying Value and
Maximum Exposure
to Loss
 
Unconsolidated
VIE Net Assets
 
Carrying Value and
Maximum Exposure
to Loss
Affiliates accounted for under the Equity Method
$
1,047.6

 
$
2,846.8

 
$
895.2

 
$
2,753.3


Affiliate Sponsored Investment Products

The Company’s consolidated Affiliates sponsor various investment products for which they also act as the investment advisor. These investment products are primarily owned by third-party investors; however, certain products are funded with seed capital investments from Affiliates. Third-party investors are generally entitled to substantially all of the economics of these products.

Certain of the Company’s Affiliate sponsored investment products are considered VIEs because they are structured as partnerships (or similar entities) and the limited partners lack substantive kick-out and substantive participation rights over the general partner. The Company's Affiliates’ involvement with sponsored investment products is generally limited to that of a service provider, and their seed capital investments, if any, represent an insignificant interest in the relevant investment products’ net assets. The Company’s and its consolidated Affiliates’ exposure to risk in these entities is generally limited to any capital contribution made or required to be made and any earned but uncollected management and performance fees. As a result, in most cases these VIEs are not consolidated and are accounted for under the equity method because neither the Company nor its Affiliates are deemed to be the primary beneficiary.

The net assets of Affiliate sponsored investment products that were considered VIEs accounted for under the equity method and the Company’s maximum risk of loss were as follows:
 
December 31, 2016
 
June 30, 2017

Unconsolidated
VIE Net Assets
 
Carrying Value and
Maximum Exposure
to Loss
 
Unconsolidated
VIE Net Assets
 
Carrying Value and
Maximum Exposure
to Loss
Affiliate sponsored investment products
$
1,756.6

 
$
9.4

 
$
1,919.4

 
$
10.1


5.
Commitments and Contingencies
From time to time, the Company and its Affiliates may be subject to claims, legal proceedings and other contingencies in the ordinary course of their business activities. Any such matters are subject to various uncertainties, and it is possible that some of these matters may be resolved in a manner unfavorable to the Company or its Affiliates. The Company and its Affiliates establish accruals, as necessary, for matters for which the outcome is probable and the amount of the liability can be reasonably estimated.
Third Avenue Management LLC (“Third Avenue”), one of the Company’s consolidated Affiliates, was named as a defendant in various legal actions relating to the liquidation and closure of the Third Avenue Focused Credit Fund. The Company was named as a co-defendant in one of these actions, as a purported control person. In 2016, Third Avenue recorded a reserve of $15.0 million in connection with the proposed resolution of all claims, including against the Company, related to the Focused Credit Fund. During the quarter, a proposed settlement of these claims, including those against the Company, was approved by the applicable courts, and the settlement payment is expected to be funded by Third Avenue and its insurers in the third quarter of 2017. The amount of the previously recorded reserve has not changed as a result of the settlement.
The Company has committed to co-invest in certain Affiliate sponsored investment products. As of June 30, 2017, these unfunded commitments were $92.1 million and may be called in future periods. In connection with a past acquisition agreement, the Company is contractually entitled to reimbursement from a prior owner of one of the Company’s Affiliates for $11.1 million of these commitments if they are called.

10
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


As of June 30, 2017, the Company was contingently liable, upon the achievement by certain Affiliates of specified financial targets, to make payments related to the Company’s investments in the Affiliates through 2019. For its consolidated Affiliates, the Company was contingently liable for up to $21.7 million, and expected to make payments of $8.9 million ($1.6 million in 2017). The present value of these expected payments was $7.8 million as of June 30, 2017. For its equity method Affiliates, the Company was contingently liable for up to $170.0 million, and expected to make no payments.
Affiliate equity interests provide holders with a conditional right to put their interests to the Company over time. See Note 12. In addition, in connection with an investment in an Affiliate accounted for under the equity method, the Company entered into an arrangement with a minority owner of the Affiliate that gives such owner the right to sell a portion of its ownership interest in the Affiliate to the Company annually beginning in 2018. The purchase price of these conditional purchases will be at fair market value on the date of the transaction.
The Company and certain Affiliates operate under regulatory authorities that require that they maintain minimum financial or capital requirements. Management is not aware of any significant violations of such requirements.
6.
Fair Value Measurements
The following tables summarize the Company’s financial assets and liabilities that are measured at fair value on a recurring basis:
 
 
 
Fair Value Measurements
 
December 31,
2016
 
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Other Unobservable Inputs (Level 3)
Financial Assets
 
 
 
 
 
 
 
Cash equivalents
$
64.1

 
$
64.1

 
$
—

 
$
—

Investments in marketable securities(1)
 
 
 
 
 
 
 
Trading securities
40.5

 
40.5

 
—

 
—

Available-for-sale securities
81.9

 
81.9

 
—

 
—

Other investments
3.4

 
3.4

 
—

 
—

Foreign currency forward contracts(2)
0.6

 
—

 
0.6

 
—

Financial Liabilities(2)
 
 
 
 
 
 
 
Contingent payment arrangements
$
8.6

 
$
—

 
$
—

 
$
8.6

Affiliate equity obligations
12.1

 
—

 
—

 
12.1

Foreign currency forward contracts
0.5

 
—

 
0.5

 
—




11
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


 
 
 
Fair Value Measurements
 
June 30,
2017
 
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Other Unobservable Inputs (Level 3)
Financial Assets
 
 
 
 
 
 
 
Cash equivalents
$
33.0

 
$
33.0

 
$
—

 
$
—

Investments in marketable securities(1)
 
 
 
 
 
 
 
Trading securities
50.1

 
50.1

 
—

 
—

Available-for-sale securities
53.5

 
53.5

 
—

 
—

Foreign currency forward contracts(2)
0.8

 
—

 
0.8

 
—

Financial Liabilities(2)
 
 
 
 
 
 
 
Contingent payment arrangements
$
7.8

 
$
—

 
$
—

 
$
7.8

Affiliate equity obligations
70.7

 
—

 
—

 
70.7

Foreign currency forward contracts
1.2

 
—

 
1.2

 
—

__________________________

(1) 
Principally investments in equity securities.

(2) 
Amounts are presented within Other assets or Other liabilities.
The following are descriptions of the significant financial assets and liabilities measured at fair value and the fair value methodologies used.
Cash equivalents consist primarily of highly liquid investments in daily redeeming money market funds, without enacted liquidity fees or redemption gates that are valued at net asset value (“NAV”).
Investments in marketable securities consist primarily of investments in publicly traded securities and funds advised by Affiliates that are valued at NAV. Publicly traded securities and funds advised by Affiliates valued using unadjusted quoted market prices for identical instruments in active markets are classified as level 1. Publicly traded securities valued using quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active are classified as level 2.
Contingent payment arrangements represent the present value of the expected future settlement of contingent payment arrangements related to the Company’s investments in consolidated Affiliates. The significant unobservable inputs that are used in the fair value measurement of these obligations are growth and discount rates. Increases in the growth rate result in a higher obligation while increases in the discount rate result in a lower obligation.
Affiliate equity obligations include agreements to repurchase Affiliate equity. The significant unobservable inputs that are used in the fair value measurement of the agreements to repurchase Affiliate equity are growth and discount rates. Increases in the growth rate result in a higher obligation while increases in the discount rate result in a lower obligation.
Foreign currency forward contracts use model-derived valuations in which all significant inputs are observable in active markets to determine fair value.
It is the Company’s policy to value financial assets or liabilities transferred as of the beginning of the period in which the transfer occurs. There were no significant transfers of financial assets or liabilities between level 1 and level 2 in the three and six months ended June 30, 2016 and 2017.
Level 3 Financial Assets and Liabilities
The following tables present the changes in level 3 liabilities:

12
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


 
For the Three Months Ended June 30,
 
2016
2017
 
Contingent Payment Arrangements
 
Affiliate Equity Obligations
 
 
Contingent Payment Arrangements
 
Affiliate Equity Obligations
Balance, beginning of period
$
7.8

 
$
35.6

 
 
$
8.9

 
$
91.5

Net (gains) losses
0.2

(1) 
—

 
 
1.7

(1) 
—

Purchases and issuances
—

 
9.7

 
 
—

 
50.8

Settlements and reductions
—

 
(18.3
)
 
 
(2.8
)
 
(71.6
)
Balance, end of period
$
8.0

 
$
27.0

 
 
$
7.8

 
$
70.7

 
 
 
 
 
 
 
 
 
Net change in unrealized (gains) losses relating to instruments still held at the reporting date
$
0.2

(1) 
$
—

 
 
$
1.7

(1) 
$
—


 
For the Six Months Ended June 30,
 
2016
 
 
2017
 
Contingent Payment Arrangements
 
Affiliate Equity Obligations
 
 
Contingent Payment Arrangements
 
Affiliate Equity Obligations
Balance, beginning of period
$
10.2

 
$
62.3

 
 
$
8.6

 
$
12.1

Net (gains) losses
(2.2
)
(1) 
—

 
 
2.0

(1) 
—

Purchases and issuances
—

 
39.8

 
 
—

 
150.4

Settlements and reductions
—

 
(75.1
)
 
 
(2.8
)
 
(91.8
)
Balance, end of period
$
8.0

 
$
27.0

 
 
$
7.8

 
$
70.7

 
 
 
 
 
 
 
 
 
Net change in unrealized (gains) losses relating to instruments still held at the reporting date
$
(2.2
)
(1) 
$
—

 
 
2.0

(1) 
$
—

___________________________

(1) 
Accretion and changes in the expected value of the Company’s contingent payment arrangements are recorded in Imputed interest expense and contingent payment arrangements.
The following table presents certain quantitative information about the significant unobservable inputs used in valuing the Company’s level 3 financial liabilities:
 
Quantitative Information About Level 3 Fair Value Measurements
 
Valuation
Techniques
 
Unobservable
Input
 
Fair Value at
December 31, 2016
 
Range at
December 31, 2016
 
Fair Value at June 30, 2017
 
Range at
 June 30, 2017
Contingent payment arrangements
Discounted cash flow
 
Growth rates
 
$
8.6

 
3% - 8%
 
$
7.8

 
8% - 9%
 
 
 
Discount rates
 
 

 
14% - 15%
 
 

 
14% - 15%
Affiliate equity obligations
Discounted cash flow
 
Growth rates
 
12.1

 
4% - 10%
 
70.7

 
1% - 10%
 
 
 
Discount rates
 
 

 
15% - 16%
 
 

 
12% - 16%
Investments Measured at NAV as a Practical Expedient
The Company’s Affiliates sponsor investment products in which the Company and Affiliates may make general partner and seed capital investments. The Company uses the NAV of these investments as a practical expedient for their fair value. The following table summarizes the nature of the Company’s investments, unfunded commitments and any related liquidity restrictions or other factors that may impact the ultimate value realized:

13
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


 
December 31, 2016
 
June 30, 2017
Category of Investment
Fair Value
 
Unfunded
Commitments
 
Fair Value
 
Unfunded
Commitments
Private equity funds(1)
$
137.8

 
$
92.2

 
$
147.3

 
$
92.1

Other funds(2)
9.7

 
—

 
4.5

 
—

Other investments
$
147.5

 
$
92.2

 
$
151.8

 
$
92.1

___________________________

(1) 
The Company uses NAV as a practical expedient one quarter in arrears (adjusted for current period calls and distributions)to determine the fair value. These funds primarily invest in a broad range of private equity funds, as well as making direct investments. Distributions will be received as the underlying assets are liquidated over the life of the funds, which is generally up to 15 years.
(2) 
These are multi-disciplinary funds that invest across various asset classes and strategies, including long/short equity, credit and real estate. Investments are generally redeemable on a daily, monthly or quarterly basis.
Other Financial Assets and Liabilities Not Carried at Fair Value
The carrying amount of Receivables and Payables and accrued liabilities approximates fair value because of the short-term nature of these instruments. The carrying value of notes receivable, which is reported in Other assets, approximates fair value because interest rates and other terms are at market rates. The carrying value of the credit facilities, which is reported in Senior bank debt, approximates fair value because the debt has variable interest based on selected short-term rates. The following table summarizes the Company’s other financial liabilities not carried at fair value:
 
December 31, 2016
 
June 30, 2017
 
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
Fair Value Hierarchy
Senior notes
$
945.1

 
$
936.0

 
$
945.4

 
$
968.5

 
Level 2
Convertible securities
307.5

 
466.9

 
308.6

 
510.5

 
Level 2
7.
Goodwill and Acquired Client Relationships
The following tables present the changes in the Company’s consolidated Affiliates’ Goodwill and components of Acquired client relationships (net):
 
 
Goodwill
 
 
Total
Balance, as of December 31, 2016
 
$
2,628.1

Foreign currency translation
 
19.4

Balance, as of June 30, 2017
 
$
2,647.5

 
Acquired Client Relationships
 
Definite-lived
 
Indefinite-lived
 
Total
 
Gross Book
Value
 
Accumulated
Amortization
 
Net Book
Value
 
Net Book
Value
 
Net Book
Value
Balance, as of December 31, 2016
$
1,290.0

 
$
(788.1
)
 
$
501.9

 
$
995.5

 
$
1,497.4

Intangible amortization and impairments
—

 
(43.9
)
 
(43.9
)
 
—

 
(43.9
)
Foreign currency translation
3.2

 
—

 
3.2

 
19.4

 
22.6

Balance, as of June 30, 2017
$
1,293.2

 
$
(832.0
)
 
$
461.2

 
$
1,014.9

 
$
1,476.1

Definite-lived acquired client relationships are amortized over their expected useful lives. As of June 30, 2017, these relationships were being amortized over a weighted average life of approximately twelve years. The Company recorded amortization expense, in Intangible amortization and impairments, for these relationships of $26.7 million and $53.4 million for the three and six months ended June 30, 2016, respectively, and $22.0 million and $43.9 million for the three and six months ended June 30, 2017, respectively. Based on relationships existing as of June 30, 2017, the Company estimates that its

14
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


consolidated annual amortization expense will be approximately $85 million in each of 2017, 2018 and 2019, $50 million in 2020 and $30 million in 2021.
8.
Equity Method Investments in Affiliates
The following table presents the change in Equity method investments in Affiliates:
 
Total
Balance, as of December 31, 2016
$
3,368.3

Equity method earnings
206.7

Equity method intangible amortization
(45.8
)
Distributions of earnings from equity method investments
(283.5
)
Investments
29.8

Foreign currency translation
3.6

Other
(0.4
)
Balance, as of June 30, 2017
$
3,278.7

In the six months ended June 30, 2017, there were no new material investments. In the six months ended June 30, 2016, the Company completed investments in Systematica Investments L.P. and Baring Private Equity Asia, both of which closed on January 4, 2016. The purchase price allocations were completed using financial models that included assumptions of expected market performance, net client cash flows and discount rates. The majority of the consideration paid is deductible for U.S. tax purposes over a 15-year life.
The aggregate purchase price allocation for the investments was as follows:
 
Total
Consideration paid
$
551.0

 
 
Definite-lived acquired client relationships
$
223.1

Indefinite-lived acquired client relationships
7.3

Deferred tax liability
(32.0
)
Goodwill
352.6

 
$
551.0

For these new investments, the Company recorded amortization expense on the definite-lived acquired client relationships of $4.5 million and $7.4 million in the three and six months ended June 30, 2016, respectively, and $3.7 million and $7.4 million in the three and six months ended June 30, 2017, respectively.
As of June 30, 2017, the definite-lived relationships at all of the Company’s equity method Affiliates were being amortized over a weighted average life of approximately 13 years. The Company recognized amortization expense for these relationships of $14.8 million and $29.0 million for the three and six months ended June 30, 2016, respectively, and $24.0 million and $45.8 million for the three and six months ended June 30, 2017, respectively. Based on relationships existing as of June 30, 2017, the Company estimates the annual amortization expense attributable to its current equity-method Affiliates to be approximately $85 million for each of the next five years.
The financial results of certain equity method Affiliates are recognized in the Consolidated Financial Statements one quarter in arrears.
The Company has determined that one if its equity method Affiliates is significant under Rule 10-01(b)(1) of Regulation S-X. For the three and six months ended June 30, 2016, this equity method Affiliate recognized revenue of $222.4 million and $428.5 million, respectively, and net income of $122.9 million and $234.6 million, respectively. For the three and six months ended June 30, 2017, this equity method Affiliate recognized revenue of $259.2 million and $524.8 million, respectively, and net income of $144.4 million and $293.0 million, respectively.

15
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


9.
Related Party Transactions
A prior owner of one of the Company’s Affiliates retained an interest in certain of the Affiliate’s private equity investment partnerships. The prior owner’s interest is presented in the Company’s Consolidated Balance Sheets as either a liability in Other liabilities or as Non-controlling interests, depending on the structure of the prior owner’s investments in the partnerships. The total liability was $67.8 million and $65.1 million at December 31, 2016 and June 30, 2017, respectively. The total non-controlling interest was $2.5 million and $1.3 million at December 31, 2016 and June 30, 2017, respectively.
The Company and its Affiliates earn asset based revenue, performance fees, distribution service, and other fees and incur distribution and servicing and other expenses for services provided to Affiliate sponsored investment products. In addition, Affiliate management owners and Company officers may serve as trustees or directors of certain investment vehicles from which an Affiliate earns advisory fee revenue.
The Company has liabilities to related parties for contingent payment arrangements in connection with certain business combinations. The net present value of the total amounts payable were $8.6 million and $7.8 million as of December 31, 2016 and June 30, 2017, respectively, and were included in Other liabilities.
The Company has related party transactions in association with its Affiliate equity transactions, as more fully described in Notes 11 and 12.

10.
Share-Based Compensation
The following is a summary of share-based compensation expense:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2016
 
2017
 
2016
 
2017
Share-based compensation
$
10.8

 
$
10.3

 
$
20.0

 
$
19.7

Tax benefit
4.2

 
4.0

 
7.7

 
7.6

The Company has $66.4 million and $83.4 million of unrecognized share-based compensation as of December 31, 2016 and June 30, 2017, respectively, which will be recognized over a weighted average period of approximately three years (assuming no forfeitures).
Stock Options
The following table summarizes transactions in the Company’s stock options:
 
Stock Options
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Life
(years)
Unexercised options outstanding - December 31, 2016
1.4

 
$
108.53

 
 
Options granted
0.0

 
152.36

 
 
Options exercised
(0.6
)
 
96.52

 
 
Options forfeited
0.0

 
140.26

 
 
Unexercised options outstanding - June 30, 2017
0.8

 
116.71

 
3.6
Exercisable at June 30, 2017
0.4

 
107.81

 
1.6

For the six months ended June 30, 2016 and 2017, the Company granted stock options with fair values of $16.0 million and $0.4 million, respectively. Stock options generally vest over a period of three to four years and expire seven years after the grant date. All options have been granted with exercise prices equal to the closing price of the Company’s common stock on the grant date. In certain circumstances, option awards also require certain performance conditions to be satisfied in order for the options to be exercised.
The fair value of options granted was estimated using the Black-Scholes option pricing model. For the six months ended June 30, 2016 and 2017, the weighted average fair value of options granted was $38.90 and $46.49, per option, respectively, based on the weighted-average grant date assumptions stated below.

16
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


 
 
For the Six Months Ended June 30,
 
 
2016
 
2017
Dividend yield
 
—
%
 
0.5
%
Expected volatility
 
30.6
%
 
30.1
%
Risk-free interest rate
 
1.6
%
 
2.2
%
Expected life of options (in years)
 
5.7

 
5.7

Forfeiture rate
 
—
%
 
—
%
Restricted Stock
The following table summarizes transactions in the Company’s restricted stock units:
 
Restricted
Stock Units
 
Weighted
Average
Grant Date
Value
Unvested units - December 31, 2016
0.6

 
$
168.84

Units granted
0.2

 
152.89

Units vested
(0.2
)
 
167.72

Units forfeited
(0.0
)
 
170.52

Unvested units - June 30, 2017
0.6

 
162.92


For the six months ended June 30, 2016 and 2017, the Company granted awards with fair values of $27.7 million and $36.4 million, respectively. These awards were valued based on the closing price of the Company’s common stock on the grant date and contain vesting conditions requiring service over a period of three to four years. In certain circumstances, awards also require certain performance conditions to be satisfied.
11.
Redeemable Non-Controlling Interests
Affiliate equity interests provide holders with a ratable portion of ownership in one of the Company’s consolidated Affiliates, consistent with the structured partnership interests in place at the respective Affiliate. Affiliate equity holders generally have a conditional right to put their interests to the Company at certain intervals (between five and 15 years from the date the equity interest is received or on an annual basis following an Affiliate equity holder’s departure). The current redemption value of the Company’s Affiliate equity interests is presented as Redeemable non-controlling interests. Changes in the current redemption value are recorded to Additional paid-in capital. The following table presents the changes in Redeemable non-controlling interests:
 
 
Redeemable Non-controlling interests
Balance, as of December 31, 2016
 
$
673.5

Changes attributable to consolidated products
 
6.2

Repurchases of redeemable Affiliate equity
 
(139.1
)
Transfers from non-controlling interests
 
47.2

Changes in redemption value
 
142.8

Balance, as of June 30, 2017
 
$
730.6

12.
Affiliate Equity
Affiliate equity interests are allocated income in a manner that is consistent with the structured partnership interests in place at the respective Affiliate. The Company’s Affiliates generally pay quarterly distributions to Affiliate equity holders. For the six months ended June 30, 2016 and 2017, distributions paid to Affiliate equity holders were $189.0 million and $178.6 million, respectively.


17
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


The Company periodically repurchases Affiliate equity interests from and issues Affiliate equity interests to its Affiliate equity holders. For the six months ended June 30, 2016 and 2017, the amount of cash paid for repurchases was $75.3 million and $85.1 million, respectively. For the six months ended June 30, 2016 and 2017, the total amount of cash received for issuances was $3.6 million and $8.0 million, respectively.

Sales and repurchases of Affiliate equity generally occur at fair value; however, the Company also grants Affiliate equity to its Affiliate partners, employees and officers as a form of compensation. If the equity is issued for consideration below the fair value of the equity or repurchased for consideration above the fair value of the equity, then such difference is recorded as compensation expense over the requisite service period.
The following is a summary of Affiliate equity expense:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2016
 
2017
 
2016
 
2017
Controlling interest
$
2.4

 
$
3.1

 
$
4.5

 
$
7.1

Non-controlling interests
4.8

 
8.8

 
8.7

 
21.4

Total
$
7.2

 
$
11.9

 
$
13.2

 
$
28.5

The following is a summary of unrecognized Affiliate equity expense:

Controlling Interest
 
Remaining Life
 
Non-controlling Interests
 
Remaining Life
December 31, 2016
$
31.3

 
4 years
 
$
70.7

 
5 years
June 30, 2017
32.8

 
4 years
 
83.8

 
5 years
The Company records amounts receivable from and payable to Affiliate equity holders in connection with the transfer of Affiliate equity interests that have not settled at the end of the period. The total amount receivable was $22.9 million and $13.9 million at December 31, 2016 and June 30, 2017, respectively, and was included in Other assets. The total amount payable was $12.1 million and $70.7 million as of December 31, 2016 and June 30, 2017, respectively, and was included in Other liabilities.

Effects of Changes in the Company’s Ownership in Affiliates

The Company periodically acquires interests from, and transfers interests to, Affiliate equity holders. Because these transactions do not result in a change of control, any gain or loss related to these transactions is recorded to Additional paid-in capital, which increases or decreases the controlling interest’s equity. No gain or loss related to these transactions is recognized in the Consolidated Statements of Income or Comprehensive Income.

While the Company presents the current redemption value of Affiliate equity within Redeemable non-controlling interests with changes in the current redemption value increasing or decreasing the controlling interest’s equity over time, the following table discloses the cumulative effect that ownership changes had on the controlling interest’s equity related only to Affiliate equity transactions that settled during the periods:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2016
 
2017
 
2016
 
2017
Net income (controlling interest)
$
108.3

 
$
126.3

 
$
212.3

 
$
248.8

Increase / (decrease) in controlling interest paid-in capital from purchases and sales of Affiliate equity issuances
(2.5
)
 
0.9

 
(3.4
)
 
(0.3
)
Decrease in controlling interest paid-in capital related to Affiliate equity repurchases
(3.8
)
 
(16.5
)
 
(21.3
)
 
(69.1
)
Net income attributable to controlling interest and transfers from Non-controlling interests
$
102.0

 
$
110.7

 
$
187.6

 
$
179.4

13.
Income Taxes

18
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


The consolidated income tax provision includes taxes attributable to the controlling interest and, to a lesser extent, taxes attributable to the non-controlling interests as follows:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2016
 
2017
 
2016
 
2017
Controlling interest:
 
 
 
 
 
 
 
Current tax
$
27.2

 
$
40.0

 
$
54.8

 
$
62.4

Intangible-related deferred taxes
21.3

 
19.1

 
43.4

 
38.9

Other deferred taxes
1.8

 
1.6

 
7.3

 
17.2

Total controlling interest
50.3

 
60.7

 
105.5

 
118.5

Non-controlling interests:
 
 
 
 
 
 
 
Current tax
$
2.2

 
$
1.9

 
$
4.2

 
$
3.8

Deferred taxes
(0.2
)
 
(0.1
)
 
(0.3
)
 
(0.1
)
Total non-controlling interests
2.0

 
1.8

 
3.9

 
3.7

Provision for income taxes
$
52.3

 
$
62.5

 
$
109.4

 
$
122.2

Income before income taxes (controlling interest)
$
158.7

 
$
187.0

 
$
317.8

 
$
367.3

Effective tax rate attributable to controlling interest(1)
31.7
%
 
32.5
%
 
33.2
%
 
32.3
%
__________________________

(1) 
Taxes attributable to the controlling interest divided by Income before income taxes (controlling interest).
14.
Earnings Per Share
The calculation of basic earnings per share is based on the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted earnings per share is similar to basic earnings per share, but adjusts for the dilutive effect of the potential issuance of incremental shares of the Company’s common stock. The following is a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per share available to common stockholders.
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2016
 
2017
 
2016
 
2017
Numerator
 
 
 
 
 
 
 
Net income (controlling interest)
$
108.3

 
$
126.3

 
$
212.3

 
$
248.8

Interest expense on convertible securities, net of taxes
3.9

 
3.9

 
7.7

 
7.8

Net income (controlling interest), as adjusted
$
112.2

 
$
130.2

 
$
220.0

 
$
256.6

Denominator
 
 
 
 
 
 
 
Average shares outstanding (basic)
53.8

 
56.3

 
53.9

 
56.5

Effect of dilutive instruments:
 
 
 
 
 
 
 
Stock options and restricted stock
0.7

 
0.2

 
0.6

 
0.3

Junior convertible securities
2.2

 
2.2

 
2.2

 
2.2

Average shares outstanding (diluted)
56.7

 
58.7

 
56.7

 
59.0

As of June 30, 2017, the Company had unsettled market share repurchases for 0.2 million shares of its common stock, which were acquired under a $32.0 million accelerated share repurchase program that was completed on July 28, 2017. 
Average shares outstanding (diluted) in the table above exclude share awards that have not satisfied performance conditions and the anti-dilutive effect of the following shares:

19
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2016
 
2017
 
2016
 
2017
Stock options and restricted stock units
0.2

 
0.2

 
0.3

 
0.2

The Company may settle portions of its Affiliate equity purchases in shares of its common stock. Because it is the Company’s intent to settle these potential purchases in cash, the calculation of diluted earnings per share excludes any potential dilutive effect from possible share settlements of Affiliate equity purchases.
15.
Comprehensive Income
The following tables show the tax effects allocated to each component of Other comprehensive income (loss):
 
For the Three Months Ended June 30,
 
2016
 
2017
 
Pre-Tax
 
Tax Benefit
(Expense)
 
Net of Tax
 
Pre-Tax
 
Tax Benefit
(Expense)
 
Net of Tax
Foreign currency translation adjustment
$
(53.9
)
 
$
—

 
$
(53.9
)
 
$
26.9

 
$
—

 
$
26.9

Change in net realized and unrealized gain (loss) on derivative securities
0.3

 
(0.0
)
 
0.3

 
(0.6
)
 
(0.0)

 
(0.6
)
Change in net unrealized gain (loss) on investment securities
(23.0
)
 
9.0

 
(14.0
)
 
(7.1
)
 
3.1

 
(4.0
)
Other comprehensive income (loss)
$
(76.6
)
 
$
9.0

 
$
(67.6
)
 
$
19.2

 
$
3.1

 
$
22.3

 
For the Six Months Ended June 30,
 
2016
 
2017
 
Pre-Tax
 
Tax Benefit
(Expense)
 
Net of Tax
 
Pre-Tax
 
Tax Benefit
(Expense)
 
Net of Tax
Foreign currency translation adjustment
$
(55.9
)
 
$
—

 
$
(55.9
)
 
$
39.1

 
$
—

 
$
39.1

Change in net realized and unrealized gain (loss) on derivative securities
(0.8
)
 
(0.0
)
 
(0.8
)
 
(0.9
)
 
0.0

 
(0.9
)
Change in net unrealized gain (loss) on investment securities
(40.4
)
 
15.6

 
(24.8
)
 
0.2

 
0.7

 
0.9

Other comprehensive income (loss)
$
(97.1
)
 
$
15.6

 
$
(81.5
)
 
$
38.4

 
$
0.7

 
$
39.1


The components of accumulated other comprehensive income (loss), net of taxes, were as follows:
 
Foreign
Currency
Translation
Adjustment
 
Realized and
Unrealized Gains (Losses)
on Derivative
Securities
 
Unrealized
Gains (Losses)
on Investment
Securities (1)
 
Total
Balance, as of December 31, 2016
$
(213.9
)
 
$
0.4

 
$
9.8

 
$
(203.7
)
Other comprehensive gain (loss) before reclassifications
39.1

 
(0.8
)
 
10.6

 
48.9

Amounts reclassified
—

 
(0.1
)
 
(9.7
)
 
(9.8
)
Net other comprehensive gain (loss)
39.1

 
(0.9
)
 
0.9

 
39.1

Balance, as of June 30, 2017
$
(174.8
)
 
$
(0.5
)
 
$
10.7

 
$
(164.6
)
__________________________

(1) 
See Note 3 for amounts reclassified from Other comprehensive income (loss).
16.
Segment Information
In the first quarter of 2017, the Company’s Chief Operating Decision Maker (the “CODM”) changed the manner in which he assesses the Company’s performance. In 2016, the CODM assessed the performance of the Company in three business segments representing three distribution channels. Given an increase in the number of the Company’s Affiliates accounted for

20
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


under the equity method of accounting and changes in the way asset management services are delivered, during the first quarter of 2017, the CODM began to assess the performance of the Company as a single global active asset management company. As a result, the CODM now reviews information organized around one operating segment to evaluate and manage the Company’s business operations. Therefore, the Company has determined that it has one reportable segment. In connection with this change, the Company completed impairment assessments based on its former three distribution channels, as well as its single global active asset management reporting unit, and determined that there were no impairments under either approach.
17.
Subsequent Events
On July 5, 2017, the Company contributed its interest in Forbes Family Trust to Wealth Partners Capital Group, LLC (“WPCG”), in return for a minority equity interest in WPCG. WPCG is a new venture which will invest, through partner firms, in smaller wealth management firms.
On July 12, 2017, the Company delivered a notice to redeem all $200.0 million principal amount outstanding of its 6.375% senior unsecured notes due 2042 at a redemption price equal to 100% of the principal amount. The Company will redeem the senior unsecured notes on August 15, 2017.


 

21


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q, in our other filings with the Securities and Exchange Commission, in our press releases and in oral statements made with the approval of an executive officer may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources and other non-historical statements, and may be prefaced with words such as “outlook,” “guidance,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “projects,” “intends,” “plans,” “estimates,” “pending investments,” “anticipates” or the negative version of these words or other comparable words. Such statements are subject to certain risks and uncertainties, including, among others, the factors discussed under the caption “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.
These factors (among others) could affect our financial performance and cause actual results to differ materially from historical earnings and those presently anticipated and projected. Forward-looking statements speak only as of the date they are made, and we will not undertake and we specifically disclaim any obligation to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of events, whether or not anticipated. In that respect, we caution readers not to place undue reliance on any such forward-looking statements.
Management’s Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q.
Executive Overview
We are a global active asset management company with equity investments in leading boutique investment management firms, which we refer to as our “Affiliates.” Our innovative partnership approach allows each Affiliate’s management team to own significant equity in their firm and maintain operational autonomy. Our strategy is to generate shareholder value through the growth of existing Affiliates, as well as through investments in new Affiliates and additional investments in existing Affiliates. In addition, we provide centralized assistance to our Affiliates in strategic matters, marketing, distribution, product development and operations. As of June 30, 2017, our aggregate assets under management were $772.1 billion, in more than 550 investment products across a broad range of active, return-oriented strategies.
We hold meaningful equity interests in each of our Affiliates. In certain cases, we consolidate the Affiliate’s financial results in our Revenue, Operating expenses and Other non-operating (income) and expenses. In other cases, we use the equity method of accounting and our share of the Affiliate’s financial results is reported (net of intangible amortization) in Income from equity method investments. Our Affiliates accounted for under the equity method are integral to our operations and, therefore, Income from equity method investments is included in our Operating income.
While we account for a majority of our Affiliates on a consolidated basis of accounting, a growing number of our Affiliates are accounted for on an equity method basis. As a result, equity method Affiliates represent a growing proportion of our Operating income, as compared to our consolidated Affiliates, which represent a decreasing proportion of our Operating income.
Whether we account for an Affiliate on a consolidated or equity method basis of accounting, we generally maintain the same partnership approach and provide support and assistance in substantially the same manner, and our operating model is generally the same. Furthermore, our Affiliates are impacted by similar marketplace factors and operational trends, which may not be observable when analyzing the financial results of consolidated and equity method Affiliates separately. Therefore, we believe our aggregate operating measures of assets under management, average assets under management and aggregate revenue, which incorporate the assets under management and revenues of all of our Affiliates, regardless of the accounting treatment, have become increasingly important in providing management and investors with a more comprehensive view of the operating performance and material trends across our entire business. Aggregate revenue is calculated by combining the Revenue of our consolidated Affiliates with equity method revenue. We discuss both Revenue at our consolidated Affiliates and equity method revenue in our Results of Operations.
The following table presents our key operating performance measures:

22


 
 
As of and for the Three Months Ended June 30,
 
 
 
As of and for the Six Months Ended June 30,
 
 
(in billions, except as noted)
 
2016
 
2017
 
% Change
 
2016
 
2017
 
% Change
Assets under management(1)